To the Editor:
America is not adapting to globalization with the required policies and strategies necessary to forge an economic framework which promotes sustainable long-term economic growth. While this country must learn to compete with countries like India and S. Korea, one nation stands alone in presenting America and her Western allies with a unique set of problems.
Two days following the big mid-term electoral rebound of conservatives and their gospel of unregulated ‘free markets’, Senate Republican Leader Mitch McConnell was asked directly about U.S. trade policy towards China. His curious reply: “I don’t really have any observation about that.”
Never mind that there is a direct cause and effect relationship between China’s unique and boldly self-serving trade strategy, the astounding scale of Western corporate subservience to China’s rigid terms for conducting business and on this side of the Pacific, our contracting domestic job market, our contracting domestic tax base and our ballooning federal, state and local deficits.
I used to believe that this increasingly obvious chain of direct economic causality would eventually strike even the most devout proponents of the free market theology squarely between the eyes.
As the physical output of goods from open, marketbased economies patterned on the Western Democratic model continues to steadily wither in the deep shade cast by the shadow of China’s booming authoritarian command economy, the time for broad public scrutiny and discussion of the features which define this strangely self-undermining trade relationship is long overdue. This topic needs to be a top national priority in 2011.
China practices a unique form of authoritarian capitalism which is directed ‘top-down’ by the central government. Their shortrun trade strategy has been specifically tailored to economically co-opt Western multi-national corporations as a means to tap into and then redirect homeward increasing percentages of the relatively large stream of disposable income possessed by Western, first world consumers.
As China’s command economy begins to complete its early phase of development, her success is built squarely on the revenue derived by winning the bulk of consumer selections made by you, me, the British, the Italians, the Australians, etc. The Chinese philosophy on trade is simple: Win by any means possible.
China’s global trade strategy has been termed ‘capture, hold and export’ and the mechanics of this strategy fundamentally violate practiced Western norms governing free trade. It works like this: China welcomes and even recruits foreign corporations looking for a slice of their enormous and surging domestic consumer market. There is however, a strictly enforced price of entry. If you wish to sell your products in China, you must manufacture and assemble those goods on Chinese soil.
As an inducement to capture and then hold foreign corporate operations, the Chinese state promptly builds all the supporting infrastructure necessary to enhance and grow these foreign ventures. Production for export back to the West and beyond is the next logical step, and most corporations enter this business path with ‘eyes wide open.’
Since China manipulates its currency so that her exports are artificially cheap while goods produced in America or Europe are artificially expensive to that desperately sought- after Chinese consumer, corporations are forced to outsource by operating on the Chinese end of this lethal trade baton.
Why would a nation like America or any other strong first world Western democracy tolerate such a onesided trade relationship? To understand this, one needs to identify the winners and losers in this lopsided arrangement. Obviously, China is the big economic winner both in the short and long run. China builds her middle class as she produces consumer good for the west. In the short-run, Western multi-national corporations win big because their ‘China built’ products are manufactured and assembled much more cheaply, particularly once they are converted back into Western currency denominations. Larger profit margins are yielded which in turn boost corporate revenue and stock values. The top echelons of corporate management get fat bonus checks and salary increases out of the deal. The broad American public and Western Europeans as well benefit along one axis … price. As consumers, we enjoy artificially low prices on these outsourced products.
The medium to long run outlook for both Western consumers and multi-national corporations is not so rosy. As quality jobs increasingly migrate overseas, that signature social strategy of our open market democracies — the middle class — continues to experience steadily downward mobility. Declining standards of living mean increasingly less disposable income. Comfortable for the moment with record level cash reserves, multi-national corporations are poised to lose a sizeable portion of their consumer base as the Western middle class erodes into increasing financial austerity. According to S&P 500 statistics, approximately 50 percent of large multi-national corporate sales revenue derives from American consumers. Across the planet, developed democratic nations are trending the way their middle class trends because it is the social strata which embodies the engine of wealth creation — they make the goods and provide the services. As the cycle of money recirculation within Western economies is increasingly diverted through China, a predictably widening trail of red ink emerges as the crumbling tax base leaves local, state and federal budgets increasingly less solvent. A quick look across America or Europe validates this observation.
Meanwhile, back in China, a middle class emerges to become its own self-sustaining engine of both production and consumption. In addition, China will increasingly obtain powerful multi-national corporations either by purchasing control of established Western firms or by creating their own corporations as direct competitors. As for that idealized Chinese consumer, remember that knowledge and technology are highly portable now. China has and will continue to obstruct any major Western inroads into the Chinese consumer market using assorted tactics (i.e. non-tariff barriers) because China simply does not practice Western style open economic competition. Examine how China has historically demonstrated such little regard for Western property rights and patent laws. Not only does China both systematically and routinely steal technology and trade secrets, they attempt to garner legitimacy by claiming patent rights on products which they have made technically trivial and frivolous adjustments to after performing a little reverse engineering.
Just ask the German and Japanese firms which built the initial leg of China’s touted high speed rail so prominently featured in recent Western new reports. Remember those mandatory shared technology arrangements? China promptly formed its very own high speed rail company using technology pirated from that initial joint venture and now competes directly against those German and Japanese originators. In short, Western corporate operations inside China are completely at her mercy. They are simply being exploited as steppingstones to fulfill China’s self preferential ambitions.
Now, finally back to Mitch McConnell’s curious, trivializing non-statement when asked about the trade policy with China. Most Senators inhabit that influential tier of society which takes very seriously the management of thick investment portfolios. In fact, a distinct social class exists which lives deeply immersed in the transnational paper world of stocks, bonds, and various other financial assets. It turns out that the investment portfolios of this financial class have greatly benefitted from the corporate move to outsource jobs. In the short run, this China connection has been a very profitable strategy. Wall Street is driven by short run profitability in the form of quarterly reports. In a globalized context of instant trading involving huge volumes of transactions daily, Wall Street is no longer economically hitched to Main Street U.S.A. or any other Western democracy.
Mr. McConnell’s opposition to reform of the financial and banking sector following the latest speculative bubble involving sub-prime mortgage swaps in combination with his dismissive attitude about the serious economic damage being inflicted on the American middle class by China’s strategically hostile trade policy reveals the astounding psychological depths in which this ideology of the ‘unfettered free market’ dwells inside the minds of these true believers. Despite absolutely overwhelming economic data and evidence detailed in countless reports about the negative impacts of trade with a predatory China, the common refrain is repeated ad nauseum: markets operate best when untouched by government regulatory meddling.
Tariffs and other punitive economic tools targeted at China violate this gospel and are simply off the table.
There exists in America a widespread misconception that simply making money is a worthy end in itself and that those who are successfully amassing wealth are intrinsically making a contribution to our economy. This sort of loose and undifferentiated logic lumps all moneymaking activity into one pot. The captains of paper assets and clever inventors of all those slick financial instruments like derivatives, credit-default swaps and hedge funds, are then mistakenly equated with the production of durable goods. Long ago, this feverish swapping of stocks, bonds and other paper assets on an hourly basis transitioned from being a means to raise capital for the end of producing a durable good or tangible service into what has now simply become a speculation driven, casino-style end in itself. The Western investor class began abandoning domestic manufacturing decades ago in favor of greener pastures offshore as well as assorted domestic financial schemes, which eventually produce speculative bubbles. Meanwhile, China builds and exports tangible products with the willing encouragement and financial backing of that very same investor class. Mr. McConnell and his social circles have accrued great wealth for themselves under this outsourcing arrangement for the past 30+ years. Statistics reveal a stunning migration of wealth away from the middle class and concentration into the hands of those income earners with thick investment portfolios at the very top.
To sum it all up, the American middle class has been thoroughly plundered from below, from above, and from abroad. America’s transition from a social safety net state into a full blown welfare state parallels the out-migration of the manufacturing sector. Middle class tax dollars paid for this enormous transition. From above, the financial class has pirated the middle class on two fronts. On one front, they speculated foolishly in under-regulated financial markets, precipitated a market collapse and got bailed out by the taxpaying middle class. Record bonus checks will be handed out this year on Wall Street in large measure because the finance and corporate class have thrived upon the outsourcing pipeline, particularly to China. On the second front, the middle class paid again … this time with their jobs. This shortsighted trade predicament which has reaped such lucrative short returns for McConnell’s ilk now threatens to undermine entire Western nations. Wobbling on a hollow economy, the financial status of America currently sways on the precipice of a complete meltdown. The concept and reality of individual liberty upon which the entire edifi ce of free and open markets depend, sways precariously with these anemic Western nations. I’m afraid McConnell’s golden goose is rapidly morphing into a vulture and Western individual liberty is on the menu.